Insurance Law in India

INSURANCE LAW IN INDIA.

What is insurance?

Part of: Financial System Protects: Economic Value of Assets

Classification of Insurance Broadly Insurance Contracts are Classified in to two (2)

categories:

1. Life Insurance

2. Non-life Insurance

3. Life contracts are not indemnity contracts

4. Non life contracts are indemnity contracts – indemnify actual loss. Insurer enjoys indemnifier privileges such as – subrogation & contribution.

Types of Insurance

Under Category 1, Life Insurance we may include: Personal Life insurance - [Not a contract of Indemnity] * Employees State Insurance *[Contracts of indemnity

* Group Health Insurance – indemnify actual loss.] * Corporate Medi-claim Insurance

Under Category, Non-life Insurance we may include: * Fire insurance * Marine, Road, Rail and Air Cargo insurance * Motor vehicles insurance * Miscellaneous insurance such as

– Public Liability Insurance – Professional Errors and Omissions insurance – Crop Insurance etc…..

Re-insurance - Insurer for insurance company

Role Players in Insurance Markets

1. Agents: Trained marketing representatives of an insurance company.

2. Brokers: Sell the products of a number of companies.3. Corporate Agents: Banks/Market brokers.4. Intermediaries: Solicit business from prospective clients e.g.

Banks/Firms/Company brokers.5. Underwriters: Decide the acceptance of a proposal and fixes

the price.6. Actuaries: Statistical analysts help in preparing

standard price tables for products.7. Third Party Administrators: Promote clientele net

works/approve the cashless limits for health care policy holds.

8. Surveyors: Assess and certify the loss of a claim in non-life insurance.

Special Features of Insurance Contracts.

All Contracts of Insurance are - Contracts (1) ‘Uberrimae fidei’.

Contracts of Insurance are - Contracts of (2) Indemnity – except in case of Life Insurance, Accident and Sickness Insurance.

Contracts of Insurance are (3) Contingent Contracts – partakes the nature of speculation or gamble, but should be distinguished from wagering agreements.

Contract of Insurance has its base in a scientific and actuarial evaluation of Risk and Premium.

Insurable Interest subsists in various Insurance Contracts.

Terms Peculiar to Insurance Contracts. Proposer is called the ‘Insured’ Acceptor is called the ‘Insurer’ Consideration for the Insurer is ‘Premium sum’ Consideration for the Insured ‘Indemnification’

in the event of loss suffered. Subject Matter of the Contract is ‘existence of

Insurable Interest’. Other important concepts related to Insurance:

*Nomination *Assignment *Subrogation*Causa proxima *Double Insurance*Constructive Total Loss *Abandonment.

Essentials Principles of Insurance Contract

1. Utmost Good Faith – (Uberrimae fidei)2. Indemnity3. Insurable interest4. Cause Proxima5. Risk: (Sharing by Average Clause)6. Average Clause: (Sharing Risk)

7. Mitigation of loss8. Subrogation9. Contribution (Co-insurers)10.Right to Salvage11.No Fault Liability (Third Party Insurance)

1. Contracts ‘Uberrimae fidei’ - means

– Contract based on utmost good faith – requiring full disclosure of all material facts – Each party to an insurance contract should disclose all

material facts relating to the proposed contract, fully and correctly, provided such facts are known to him.

– What a material fact is a question fact in each case. It may be defined to mean

– those facts which form the basis for the contract

and – the knowledge of which can influence the willingness of a party to enter into a contract.

This is an exception to the Rule – Caveat emptor.

Contracts ‘Uberrimae fidei’ - 2

Obligation to disclose all material facts is cast upon both the parties to an Insurance Contract.

However, the obligation of utmost good faith on the part of the Proposer (i.e. the Insured) is, generally included in the Contract of Insurance as one of the specific conditions.

The logic behind such requirement is that: a) The proposer is on a vantage ground, being in

possession of the information of all material facts relating to the subject matter of the Insurance Contract; whereas the Insurer has no access to such information.


b) The Insurance Contract shifts risk from one person to another. Therefore, to enable the Insurer to judge:

i) the extent of risk he is contemplated to undertake; ii) whether he should accept the risk; and iii) the amount of premium he should charge

from the insured - the Proposer must disclose all material facts

fully and correctly.


The duty of the Proposer to observe utmost good faith continues till the conclusion of the

Contract of Insurance. It extends to all facts which he considers to be

material, and, to those facts which a reasonable man would consider as material.

He is, however, not liable if the facts, though material, come to his knowledge only after the conclusion of the Contract.

Contracts ‘Uberrimae fidei’ - 5 Effects of Non-disclosure of Material Facts: When the Proposer of an Insurance Contract does not

observe utmost good faithThe contract becomes voidable at the option of Insurer.It is immaterial whether the non-disclosure is

intentional and fraudulent or otherwise.The plea that the insured did not disclose a fact

considering it to be immaterial rather than a material fact, can not be put up as a defence by an Insured - in a suit by the Insurer, praying for rescission of the Insurance Contract.

Thus, failure to disclose all material facts with utmost frankness, entitles the Insurer to avoid the Contract.

2. Contracts of Indemnity An Insurance Contract is a Contract whereby A person, called Insurer, undertakes to indemnify another person called the Insured, in case of loss on the happening of a specified uncertain event, in consideration of a sum of money called Premium.

Illustration: A gets his house insured with an insurance company B, against fire for one year and pays the premium. The liability of B arises only if A’s house catches fire with in the year and does not arise if the house does not catch fire during the year. The liability to indemnify the Insured by the Insurer is contingent upon the house catching fire in that agreed period.

Indemnity-2 (Exception to: Rule of Stranger to Contract)

A contract of insurance is a contract of 'indemnity'. It means: The insured - in case of loss against which the policy has been issued - shall be paid the actual amount of loss not exceeding the amount of the policy. IOW: He/She shall be fully indemnified. The object of every contract of insurance is to place the insured in the same financial position, as nearly as possible, after the loss, as if the loss has not occurred, at all. This Principle is applicable to - all types of insurance, Exception – life, personal accident, and sickness insurance.

When A Contract of Insurance is - Not A contract of Indemnity?

If a fixed amount is paid - by the insurer to the insured ` - on the happening of the event, - irrespective of the fact, whether - the insured suffered a loss or not.

Example: In life insurance, the insurer is liable to pay the sum mentioned in the policy on the death, or expiry of a certain period i.e. upon maturity of the policy.

3. Insurable Interest

A person has a right to get a particular subject-matter insured, only if he/she has an insurable interest in it.

The terms ‘Insurable Interest’ implies that - the Insurer is situated in a legally recognised

relationship with the thing insured; and - the relationship with the thing insured is such

that he will suffer a pecuniary loss on its destruction.

IOW, - the insured will benefit financially from the existence of the subject-matter;

- he will suffer financial loss from the non-existence of the subject-matter.

Insurable Interest - 2

Thus Insurable Interest implies: 1. A legally recognised relationship between the subject-

matter insured and the Insurer.2. The Insurer has a pecuniary or financial interest in the

subject matter. He will have – financial benefits, if the subject-matter

remains in existence and – will have financial loss, if the subject-matter is

destroyed.3. The Insurable interest, however, must not be

- a mere expectation or anxiety or sentimental interest etc., It must be real and actual.

4. Insurable interest need not be present at the time of settlement of claim of a Nominee in life insuranc

Example: 1. A person has insurable interest in his life; 2. A transporter has insurable interest in his vehicles; 3. A house owner has insurable interest in his house …

4. Cause Proxima The rule of 'causa proxima' means:

The cause of the loss must be - proximate; or - immediate and - not remote.

If the proximate cause of the loss is a peril insured against, the insured can recover.

When a loss has been brought about by two or more causes, the real or the nearest cause shall be the causa proxima, although the result could not have happened without the remote cause.

But, if the loss is brought about by any cause attributable to the misconduct of the insured, the insurer is not liable.

5. Risk (Sharing by Average Clause)

In a contract of insurance - the insurer undertakes - to protect the insured - from a specified loss and - the insurer receives a premium

- for running the risk of such loss.

• Therefore, it is essential that - Risk must fasten to the Policy.

6. Average Clause (Sharing the Risk)

Where there is an ‘underinsurance’ - the condition of ‘Average Clause’ applies.

Underinsurance occurs when Sum Insured is less than Current Value of the asset insured.

This insurance term is used when calculating a payout against a claim where the Policy undervalues - the sum insured.

In the event of partial loss, the amount paid against a claim will be in the same proportion as the value of the underinsurance.

For example: if stock in a godown worth Rs.10 lakhs but insured for Rs.5 lakhs is totally destroyed, the insurers will only pay Rs. 5,00,000/-. Thus, they make the insured to share the risk for his act of ‘underinsurance’.

Sum Insured is the maximum amount that can be paid out and is only paid out in cases of total destruction.

In most of the cases, partial destruction occurs and claims are made accordingly. Where partial destruction occurs, Payout is pro rata in line with the underinsurance. This is because, insurance companies calculate and collect the premium on their risk of losing the full Sum Insured in case of total destruction of the subject matter covered by Insurance Policy.

The formula is Sum Insured Payout = Claim × ˗˗˗˗˗˗˗˗˗˗˗˗˗˗˗˗˗˗˗ Current Value Where Payout is the amount paid out by the policy; Claim is the amount of loss claimed against the policy;

Sum Insured is the maximum amount to be paid

out by the policy, and Current Value is the value the policy should be insured for.

Underinsurance occurs when Sum Insured is less

than Current Value

7. Mitigation of loss To mitigate the loss means – to minimise loss. In the event of some mishap to the insured

property , the insured must - take all necessary steps

- to mitigate or minimise the losses, - just as any prudent person would do - in those circumstances of loss - attributable to his negligence.

Though the insured is bound to do his best for his insurer - he is not bound to do so at the risk of his life.

8. Subrogation The term ‘subrogation’ literally means ‘substitution’.

- substitution of the insurer in place of the insured

- in respect of the latter’s rights and remedies.

As per the principle of subrogation - the insurer steps into the shoes of the insured - becomes entitled to all the rights of the insured - regarding the subject matter of insurance - after the claim of the insured has been fully and finally settled.

The doctrine of subrogation is a corollary to the principle of indemnity and applies only to fire and marine insurances.

9. Contribution. When there are two or more insurances on one risk

– the Principle of Contribution comes into play.

The aim of contribution is - to distribute the actual amount of loss - among the different insurers - who are liable for the same risk - under different policies - in respect of the same subject matter.

Any one insurer may pay to the insured - the full amount of the loss - covered by the policy and

- become entitled to contribution from his co-insurers - in proportion to the amount which each has undertaken to pay - in case of the loss of the same subject matter.

Principle of Contribution - 2

In other words, the right of contribution arises when:-

There are different policies which relate to the same subject matter.

The policies cover the same peril which caused the loss.

All the policies are in force at the time of the loss.

One of the insurers has paid to the insured more than his share of the loss.

• In case of Life Insurance, double claims are allowed.

10. Principle of Right to Salvage

Salvage means – the portion of goods or property that has been saved or remains after some type of casualty, such as a fire.

The term ‘salvage’ is defined more specifically depending on the industry referring to it.

In business, salvage is any property that is no longer useful but has scrap value. An example of business salvage is obsolete equipment.

In insurance, salvage is the portion of property that the insurance company takes after paying the claim for the loss. The insurance company may deduct the salvage value from the amount of the claim paid and leave the property with the insured.

After Liberalisation of Indian Economy• Four public sector General Insurance

companies have become autonomous

• Doors have been opened to Private players both in Life and General Insurance Business

• Presently around 25 companies each in life & non-life Insurance are transacting the business

MAJOR TURN IN THE INDUSTRY• In April, 1993 Govt. has appointed a High Power Committee

headed by Dr. R. N. Malhotra Former Governor of R.B.I. – to examine the structure of the insurance industry and – to recommend changes to make it more efficient and competitive

• keeping in view the structural changes in other parts of the financial system of the economy.

Recommendations Dr. R. N. Malhotra has submitted his report

on 7th January, 1994. Its recommendations, inter alia, included:

Establishment of a strong and effective Insurance Regulatory Authority in the form of a statutory autonomous board on the lines of Securities and Exchange Board of India

I.R.D.A.• Consequently, Insurance Regulatory and Development

Authority Act, 1999 was enacted• An Act to provide for the establishment of an authority

- to protect the interests of holders of insurance policies - to regulate, promote and ensure orderly growth of the insurance industry and - for matters connected therewith or incidental thereto; and further - to amend the Insurance Act, 1938 , the Life Insurance Corporation Act, 1956 and General Insurance Business Nationalisation Act, 1972.

Contingent Contract

The liability of the Insurer, in a contract of Insurance, is - dependent upon (contingent upon) - the happening of an uncertain event.

Thus an Insurance Contract resembles a Wagering Agreement, because a Wagering Agreement is a promise to pay money or money’s worth upon determination or ascertainment of an uncertain event.

An Insurance Contract is, in essence, a wager upon

– the continued existence of life or property insured. It is a Contingent Contract and, therefore, partakes the nature of speculation and gamble.

Insurance Contract vs. Wagering Agreement A contract of insurance, though contingent in character, cannot be termed wager because it differs from wagering agreements in many ways.

1. In a contract of Insurance, the Insured has insurable interest in the subject-matter insured .

Whereas in a wagering agreement, no party has any interest in the agreement except the interest to be paid or received under it.

Insurable interest implies the pecuniary or financial interest in the existence of the subject-matter insured.

Insurance Contract vs. Wagering Agreement - 2

2. A contract of insurance is a contract of indemnity (except in case of life, accident and sickness) and as such the insured is entitled to receive only the actual amount of loss (not exceeding the amount for which it has been insured)

– in case of any loss from the risk insured. But in case of wagering agreement, the amount to be paid by either party is fixed in all cases.


3. The object of a contract of insurance – is Protection of insured against loss occurring on account of a specified event; and– Is beneficial to the society.

The object of a wagering agreement – is to make speculative gains; and – it ruins the society.


4. A contract of insurance is a contract of utmost good faith; Whereas a wagering agreement is not so.

5. A contract of Insurance has its basis in a scientific and actuarial evaluation of risk and premium;

Whereas in case of wagering agreement it is not so.

Nomination.

Nomination implies: Specifying the name of a person To whom the insured money shall be payable In the event of the death of the Insured In case of a Life Insurance.Note: Nomination is a concept relevant to Life

Insurance Policies. Such Nomination may take place

Either at the time of effecting the policy Or at any time before its maturity.

Assignment.

Assignment implies The process, whereby the rights and liabilities of the Insured under a policy are transferred to another person.

It takes effect when a notice to the effect is sent to the Insurer.

The assignment is endorsed - either on the Insurance policy - or on a separate instrument, prepared for this purpose.

Assignment - 2.

If the assignment is to be legally valid, it should take place before maturity of the policy; and for a consideration, or in those exceptional cases where a contract

without consideration is valid. The assignee of a policy gets it

subject to the rights and liabilities of his assignor.

Nomination vs. Assignment.1. Nomination is a feature peculiar to life polices.

Whereas assignment of policy can take place in every kind of insurance policy.

2. The Nominee of a life policy has a right to receive insured money only in the event of death of the Insured.Whereas in case of Assignment, the Assignee has a right to receive insured money even during the life of the Insured.

Nomination vs. Assignment - 2

3. The Nomination of a life policy can be revoked at any time before maturity of the policy;

Whereas Assignment is irrevocable. Further, Assignment of a life policy results in automatic cancellation of Nomination.

4. The object of Nomination is to entitle the Nominee to recover the insured money in the event of death of the Insured; Whereas the object of Assignment is to transfer the rights and liabilities of a policy holder under it.

Nomination vs. Assignment - 3

5. Nomination does not result in vesting the property in the policy in the Nominee; Whereas Assignment results in vesting the property in the policy in the Assignee.

6. Nomination does not require any consideration; whereas it is essential in case of Assignment.

7. Nomination can be made by an endorsement on the policy only; whereas Assignment can be made – either on the policy – or by a separate deed.

Some Tips.

No-fault Liability otherwise known as Third Party Liability Insurance. It is peculiar to Motor Vehicles Insurance. The Principle of ‘Causa of Proxima’ shall not affect Liability arising to third party; nor the Doctrine of Privity of Contract. It is an exception to the rule of ‘stranger to contract’.

Restrictions on Transfer of Policy: Change in ownership - ends the liability. Exception: Motor Insurance.

In case of Life Insurance, double claims are allowed.

THANK YOUProf. Dr. KSN Sarma

Icfai Business School (IBS)Hyderabad

Insurance Law in India

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